Top 3 Reasons Your Stock Prices Won’t Go Higher
How To Pick Fast Rising Nigerian Stocks To Buy Now – Learn To Avoid Low Priced Stocks & Select Top Gaining Growth Stocks In Nigerian Stock Market Today.
I had a discussion with someone (name withheld, but let’s call him Michael) who wanted to understand the reasons some shares rise faster than others. His portfolio had more “low-priced stocks” trading below N10, which he deliberately selected to take advantage of volume-driven profit; what I mean is, the stock units he owns ranged from 100,000 – 300,000, then I asked why he adopted that trading strategy, he said he believed that “someday” those shares would increase by N1 and he’ll make millions of Naira.
If you take a closer look at his expectations, they aren’t far from reality, those penny stocks might rise and earn him a minimum of N100k profit on each share. But, here is the sad reality, his portfolio return had been on the negative territory for 2 years now, the stocks, which were “randomly selected” had been down. As at when I checked his purchase price against the current market price, some stocks nosedived to less than 50k after NSE lifted the 0.50k minimum price per share restriction.
My next action plan:
I started teaching him some principles of stock market trading, one of such was understanding the key drivers of a stock price.
The truth is a stock isn’t cheap because the price is low compared to industry peers, besides, top stocks like Nestle, SEPLAT, Zenith trading for N1300, N770 and N30 per share could be cheaper than an Insurance stock that trades for 55k, you may ask how? how can I say N1300 is cheaper than 55k, isn’t that a deceit? Let me share what you don’t know, in the stock market, being cheap is not about what a share price is but it’s on how fast the company is growing compared to what investors are currently paying which is measured by its price-earning ratio.
I had once overlooked a great consumer goods stock because it sold for N15 and picked an insurance stock that sells for N1.65, you know what happened? I watch the N15 stock move faster to N34.5 in 2 months while the N1.65 was consolidating between N1.65-N1.9 until it fell to N0.75. The low-priced company didn’t beat analyst expectation when they released their first quarter result while the “high-priced” stock posted a double-digit growth in sales and profits.
I shared this experience to let you see that the price of company’s shares doesn’t determine how cheap the share is but beyond that, you need to understand the key drivers of shares and check whether they are present in the company you are buying irrespective of the market price.
Back to the discussion I initially started, I requested for a review of all the equities in Michael’s portfolio so I could share 3 cogent reasons his shares have been stagnant for a long time.
Investors perception about the sector
This is one of the biggest drivers of a company’s performance. The direction of a sector is largely driven by government policies, programme and fund support level. A company stock tends to do well if recent sectoral laws and policies will help boost local business activities, save cost or make operation performance better.
When government enact policies, as seen in the recent CBN dividend payment policy for banks, investors always interpret how companies, in the host sector, are affected. As a smart investor, it’s important for you to follow the latest sectoral news in Nigeria. A key reason the insurance sector isn’t growing as faster as its peers in other countries hinges past government policy on insurance, though few stocks are really doing well in that sector, I still tag it a cautious sector to invest in, except you follow my guide on how to pick best-performing stocks to buy now.
Here is a downside to following the latest news every day, you might not have the time or could miss a major breaking news about certain sector of the economy but you know what I do, I use the top-down strategy, I look for top-performing sector and try to find out top news that is driving the sector.
I had also shared tips on how to spot the right sector to focus and why you should never ignore the fundamentals of a sector before buying your next stock.
As of this writing, Japaul Oil and Maritime Service Plc is currently attracting huge buy interest after the news of additional fund injection from Milos Global, a US-based private equity firm broke out. The stock had suffered massive sell-off last year, a dump that wasn’t unconnected to the falling oil price in the global market. This affected the servicing firm’s clients who were exposed to the crude oil market, and as they began to scale down operations, the company couldn’t recover her receivables. But now that there is a new capital injection to help Japaul Oil repair damaged vessels, diversify its revenue sources and become less reliant on oil, the share price is staging a comeback.
The company had started enjoying investors patronage after it announced a $350 million financing deal from Milost Global, a private equity firm based in New York. The chairman of Japaul Oil, Mr Paul Jegede, had disclosed that Milost will invest $250 million in equity and another $100 million in convertible loans in the company. He noted that fresh injection of capital will enable the company to fix grounded vessels, finance new contracts and expand into mining. Consequently, the sustained investors’ interest resulted in rising in the company’s share price to N0.97 from N0.63 within the week.
Another example of company-specific news is that of Oando Plc. Investors are currently following the outcome of the forensic audit currently going in the company. Besides, the stock was on a bearish trend as the news of insider activities broke out.
This is a typical example of how company-specific news can drive a company’s share. A
Financial result – quarterly and annual report
This is one of the biggest drivers of a company’s share price. In the stock market, smart investors are constantly searching for companies whose fundamentals are great and if you can spot such stocks, I bet you, making a consistent profit on your investment is becomes a sure outcome. Here, I pay attention to the sales or earnings figures, operating efficiencies, profit margin, debt level and cash positions. When a company surpasses analyst expectations, investors tend to buy the stock for dividend income or price appreciations.
You can read up my complete guide on how to easily pick top-performing stocks.
I believe you now have a perfect understand of the reasons some stocks rise faster than the others, so when next you want to check or select stocks, use these to guide your choice of companies.